A common mantra in real estate: location, location, location. When starting a business or expanding an existing one, one of the critical decisions is finding a commercial rental space in a good location. Not only the location but also the size and layout of the space can significantly impact the business’s success. However, finding the perfect rental space is only the first step. Negotiating a commercial lease with the landlord is equally important to ensure that the lease agreement meets the needs of both parties.
Negotiating a commercial lease can be complex, but with some preparation and knowledge, you can successfully negotiate beneficial terms. Read on to learn how to negotiate a commercial lease.
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What is a Commercial Lease Application?
A commercial lease application is a document used in commercial tenant screening that gives landlords a detailed picture of prospective tenants, businesses, and their owners.
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The information provided in a commercial rental application helps landlords perform credit checks, reference checks, background checks, and more during the tenant screening process.
You can rent your favorite commercial space by signing a commercial lease agreement form if you meet the landlord’s requirements based on the information provided.
Most commercial lease applications include the following information:
- The landlord’s contact information
- The commercial property’s address
- Applicant business information, such as office address, type of entity, state of incorporation if the entity is a corporation, and federal tax ID number
- Business owner’s contact information and personal information such as Social Security Number and driver’s license information
- Supporting information about the tenant, such as sources of income, liabilities, current assets, and previous commercial rental history
- Business and bank references that show whether or not the tenant is financially stable
How to Negotiate a Commercial Lease: 10 Tips
If you find the perfect location for your business, the next step is to negotiate your lease. Here are some steps to help you negotiate a commercial lease:
1. Consider your budget and needs.
Before starting negotiations, you should evaluate your budget and space requirements for your business. Determine how much square footage you need and what amenities you require, such as a loading dock, ample parking, or outdoor display space.
Then, do your homework and gather enough information to look into comparable market rents and compare the costs of commercial leases. So you can negotiate a fair price.
2. Evaluate the main terms of a commercial lease.
The terms of a commercial lease define the rights and responsibilities of both parties and establish the conditions under which the property can be used. This knowledge will help you negotiate a fair lease agreement. Keep an eye on the details listed below:
- Rent: This is the tenant’s payment for the property’s right to use.
- Lease term: This is a duration of time set out in a contracted lease agreement.
- Maintenance and repairs: This outlines the responsibilities for maintaining and repairing the property, who is responsible for repairs and maintenance, and what types of repairs are required.
- Use of the property: This is the right to use and occupy the property for a set period of time.
- Security deposit: This is an amount of money a tenant pays to a landlord before moving into a rental property and may be used for any damages or unpaid rent.
- Termination: It is the ending of the lease agreement. Your lease agreement should clarify the obligations of each party, termination scenarios, and default procedures.
Mutual Termination: Use a Lease Termination Letter to confirm not to renew a current lease Landlord Termination: Use an Eviction Notice to give a tenant a date to leave your rental unit. Tenant Termination: Use a Notice to Vacate to inform the landlord of your move-out plan.TIP
3. Put your negotiations in writing.
Documenting any agreements ensures keeping both sides’ word. It is essential to avoid misunderstandings or disagreements later. You can submit a written proposal outlining your lease requirements and desired terms to the landlord or their representative. This can serve as a starting point for negotiations and provide a reference for both parties throughout the negotiation process.
4. Consider getting an agent or lawyer to negotiate for you.
Commercial leases involve complex clauses and high amounts of paperwork. Hiring a commercial real estate agent or lawyer can be beneficial in negotiating a lease. You may not be aware of the deals and terms, and there might be dark holes of a lease, such as hidden fees and relocation rights. They can provide valuable advice, help you navigate complex lease terms, and protect your interests throughout the negotiation process.
5. Discuss future renewal options.
Typically, commercial leases are from month to month. When negotiating a lease, discussing renewal options with your landlord is crucial if you want to control the longevity of your future use or if you are a newer business and want the flexibility of a shorter lease to assess business viability. Under any circumstances, you should discuss renewal options and make sure you understand the terms for renewal and have the option to extend your lease if necessary.
6. Discuss termination conditions.
Discussing termination conditions, including the penalties for early termination, is essential. Ensure you understand the terms and conditions for terminating your lease agreement, including any financial or legal implications.
There are several common conditions for commercial lease termination, including:
- Mutual agreement: If the landlord and tenant agree to terminate the lease, they can do so at any time.
- Tenant default: The lease agreement typically outlines the conditions under which the landlord can terminate the lease for tenant default. These conditions include not paying rent or violating other lease provisions.
- Landlord default: Like tenant default, the lease agreement typically outlines the conditions under which the tenant can terminate the lease for landlord default. For example, not making necessary repairs or maintenance gives the right to terminate the lease.
- Expiration of the lease term: When the agreed-upon lease term ends, the lease agreement will terminate unless the landlord and tenant renew or enter into a new agreement.
- Early termination clause: Some lease agreements include an early termination clause, allowing the landlord or tenant to terminate the lease under certain conditions. It specifies the conditions and any penalties or fees associated with early termination.
7. Negotiate early termination penalty fees.
Negotiating early termination penalty fees is crucial if you need to terminate your lease early. You should try to negotiate reasonable penalties and ensure they are outlined in the lease agreement.
8. Negotiate the force majeure clause.
The force majeure clause outlines unforeseeable events that may affect the lease agreement, such as natural disasters, terrorism, or war. Negotiating this clause can protect you in case unforeseeable events may disrupt your business.
9. Negotiate free rent periods.
Free rent is one of the popular promotions for landlords. Negotiating for free rent periods can help you save money in the beginning stages of your lease agreement. You can try to negotiate a free rent period to set up your business and generate revenue before paying rent.
10. Ask to include favorable clauses.
You can negotiate for favorable clauses in your lease agreement, such as the right to sublet, a grace period for late rent payments, or the ability to alter the space. Make sure to negotiate for clauses important to your business that align with your needs.
When Do You Need a Commercial Rental Application?
Commercial properties rented out specifically for business purposes need commercial rental applications.
Unlike residential rental applications, commercial lease applications are specifically for renting commercial property to tenants who want to operate a business.IMPORTANT
Here are some examples of types of properties that require commercial rental applications:
Restaurant Retail Spaces
Property owners rent retail restaurant spaces to tenants who want to open dining establishments.
Restaurateurs seek rentals for their businesses in high-rise urban buildings, standalone structures, shopping malls, strip malls, and more.
Landlords can ask industry-specific questions to determine whether or not a potential tenant is a good fit for your restaurant retail space for rent, such as:
- What kind of cuisine(s) does the business service, and at what price? Think about the neighborhood your property is in and what most people in the area want to eat. You should rent your space to a restaurant that can generate enough income to pay rent and bring value to your property.
- What is the ambiance of the restaurant? What kind of colors, decor, and lighting does the potential tenant want to use in your space? Does the applicant’s business plan clash with renovation restrictions? The prospective tenant’s ideas for your space could be a deal-breaker. If you are leasing your commercial space for a short time and the tenant wants to make changes, it may be time-consuming to return the commercial space to its original condition.
- Why did you leave your previous location? If the applicant left a prior place because of a breach of lease, that potential renter might be a bad tenant for your commercial space.
- How much capital do you have? In other words, does the applicant make enough to stay in business and pay rent on time?
Retail Spaces
Commercial property owners rent retail spaces for a variety of businesses and startups.
These ventures often seek rentals in single-use buildings like big-box stores or multi-tenant complexes like shopping centers.
Landlords can ask the following in a business rental application form to identify the ideal tenant for their retail space:
- What kind of store does the tenant own? Is this store a franchise outlet or a small, family-owned business? This question gives you a better idea of how the applicant’s company might fit into your property and neighborhood. It also gives you a better understanding of the potential renter’s financial projections.
- What services or products do you offer? If you rent space in a multi-tenant complex and the applicant’s services or products compete with another tenant in your commercial building, the situation may cause conflicts.
- How much experience do you have in your industry? Is the business a startup, or has it been around long? If someone with minimal industry experience heads the company, proceed with caution. Otherwise, you may rent to someone who cannot pay on time.
Office Spaces
Landlords rent business or office spaces to tenants who want to open companies like law firms and tech startups.
Similar to retail spaces, office spaces can be standalone, single-use buildings, or multi-tenant.
Office spaces are often in urban or suburban areas. In urban areas, you will typically find them in high-rise buildings. In suburban areas, office space is usually in strip malls and standalone structures.
The following questions in an office rental application form helps determine if an applicant will make a good tenant in your office space:
- What kind of business is this? For example, is your ideal tenant a law or accounting firm? What law or accounting firm would you like to see in your space?
- How will this business expand in the next few years? Will it sell a broader range of products or services? If so, will these offerings conflict with those of other tenants in the building?
